Noisy Retrievers and the Fourfold Reaction to Rare Events

36 Pages Posted: 13 Sep 2013

See all articles by Davide Marchiori

Davide Marchiori

Ca Foscari University of Venice

Sibilla Di Guida

Department of Business and Economics, Syddansk Universitet

Ido Erev

Technion-Israel Institute of Technology - William Davidson Faculty of Industrial Engineering & Management

Date Written: April 2013

Abstract

Previous research documents two pairs of inconsistent reactions to rare events: 1) Studies of probability judgment reveal conservatism which implies overestimation of rare events, and overconfidence which implies underestimation of rare events; 2) Studies of choice behavior reveal overweighting of rare events in one-shot tasks, and the opposite bias in decisions from experience. The current analysis and experimental results demonstrate that the coexistence and relative importance of the four biases can be captured with simple models that share the assumption that judgments and decisions are made based on the information conveyed by small and noisy samples of past experiences.

Keywords: Black swan, prospect theory, experience-description gap, case-based decision theory, overgeneralization

JEL Classification: C79, C91, D81

Suggested Citation

Marchiori, Davide and Di Guida, Sibilla and Erev, Ido, Noisy Retrievers and the Fourfold Reaction to Rare Events (April 2013). Department of Management, Università Ca' Foscari Venezia Working Paper No. 3/2013. Available at SSRN: https://ssrn.com/abstract=2324415 or http://dx.doi.org/10.2139/ssrn.2324415

Davide Marchiori (Contact Author)

Ca Foscari University of Venice ( email )

Dorsoduro 3246
Venezia, 30123
Italy

Sibilla Di Guida

Department of Business and Economics, Syddansk Universitet ( email )

Campusvej 55
Odense M
Denmark

Ido Erev

Technion-Israel Institute of Technology - William Davidson Faculty of Industrial Engineering & Management ( email )

Haifa 32000
Israel

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